Gulf, Asia economic links yet to fulfil promise

Manama, October 18, 2011

On the face of it, the economies of the oil-rich Gulf and of fast-growing Asia are a perfect match. Yet they face a long slog to dispel the suspicion that theirs is no more than a marriage of convenience.

Barriers that have kept investment strikingly modest, the scant need for capital and a yawning divide of culture and language will have to be overcome if the two regions want to enrich what is now a fairly basic relationship: the Gulf ships oil and gas to Asia and recycles part of the petrodollars by importing manufactured goods, construction services and labour, most of it low-skilled.

"The fact that Asia and the Middle East, in particular the Gulf, account for a growing share of the global economy means that intra-regional investment will inevitably grow and mature.But it will likely be a slow process, evolving over decades rather years," said Ben Simpfendorfer, managing director of Silk Road Associates, a Hong Kong consultancy.

He was speaking at a conference in Bahrain at the weekend organised by the International Institute for Strategic Studies, a London think tank, to explore the geo-economic and strategic links between the Gulf and Asia.

However those ties evolve, energy will remain central to the relationship. By 2017, the Economist Intelligence Unit reckons Asia will be the largest trading partner of the Gulf Cooperation Council states.

And by 2030, Asia will rely on imports to satisfy 90 percent of its domestic oil consumption, up from 75 percent today.

The GCC's exports to Asia already jumped 55 percent between 2003 and 2009, reaching $174 billion, while Asian exports in the other direction leaped 70 percent to $81 billion.

Thirty years ago, the six GCC nations conducted 80 percent of their trade with North America and Europe. Today, Asia's share is 50 percent.

As such, the relationship can be viewed as symbiotic. While public attention usually focuses on security of oil supplies for consuming nations, locking in reliable Asian customers is also important for Gulf producers as Europe and the US strive to reduce their dependence on the region.

This is why Abu Dhabi has invested in strategic oil storage in South Korea and Japan, according to Robin Mills, an independent energy consultant. His paper was distributed in absentia.

"The Chinese market is of strategic importance for the Gulf countries in terms of oil export security," said Yang Guang, director general of the Institute of West Asian and African Studies at the Chinese Academy of Social Sciences, a government think tank in Beijing.

China is now the world's second-biggest oil importer and accounts for 40 percent of global growth in oil demand. It gets nearly 60 percent of its oil from the Middle East and will soon overtake the US as the biggest buyer of Saudi oil.

For its part, Saudi Arabia recently became the leading petrochemical supplier to China's textile industry, said Chas Freeman, a former U.S. ambassador to Riyadh who also served as a senior diplomat in Beijing.

"The East is not just the future of the Gulf's export-oriented economies, it is also to a great extent their present orientation," Freeman said.

But the investment that would normally flow from such interdependence is thin. Take China. GCC countries invested $221 million in China in 2009, out of total foreign direct investment that year of $90 billion, while flows in the other direction were just $185 million.

Saudi Arabia and Kuwait are building joint venture refineries in China, but oil is a strategic sector for most governments in Asia and the Middle East, limiting the opportunities for foreign investors.

Moreover, the Gulf and China are not able to provide the advanced technologies that each is seeking; expertise is in Western hands, speakers from both regions concurred.

Nor does either side need to attract capital. Both run hefty current account surpluses. In the financial sphere, China's capital controls also restrict the Gulf's sovereign wealth funds, even though the Kuwait Investment Authority opened an office in Beijing last week.

The Gulf would appear to be a candidate for Chinese companies seeking to move offshore to reduce costs. "However, these expectations cannot be met in the Gulf region as local labour costs are relatively high," said Yang, the Chinese researcher.

A free-trade agreement between China and the GCC, under negotiation since 2004, would help boost non-oil and investment flows but would not overcome what one speaker called the "mutual ignorance" that separates the two regions.

Freeman referred to "radical differences" in political and business structures that would make friction inevitable as the two learn to work with each other.

Afshin Molavi, a senior research fellow at the New America Foundation in Washington, said neither Asia nor the Gulf had effectively promoted integration through social, cultural and religious links.

Elites in both regions typically send their children to university in English-speaking countries in the West, establishing influential "soft power" networks in the process. China, for example, has nearly 128,000 students in the US but only about 50 in Saudi Arabia, Molavi said.

If the conference confronted the obstacles in the way of more dynamic ties, it also highlighted the opportunities for a richer relationship.

Chinese businesses could make up for soft-power shortcomings by collaborating with Gulf investors to improve food production in Africa, suggested Zha Daojiong, a professor of international political economy at Peking University.

Tellingly, Dubai is already home to thousands of Asian firms, increasingly from China, which use it as a hub for their operations in the Middle East and Africa.

Islamic financing is another underdeveloped field ripe for cooperation between Asian and Gulf banks, while Mills, the energy consultant, said Gulf producers may be able to leverage their importance as feedstock suppliers into more industrial projects in China and elsewhere.

On the trade front, Asia is already moving up the value chain. Electrical and machinery products, not textiles, are now the biggest category of Chinese exports to the Gulf.

China is also winning more construction contracts, although it trails well behind South Korea, which bagged 47 percent of all major engineering, procurement and construction awards in the GCC awarded in the year to March 2011, noted Terry Newendorp, a specialist in energy and infrastructure financing who chairs US firm Taylor-DeJongh Inc.

South Korea also caused waves in 2009 when Korea Electric Power Corp won a $18.6 billion contract to build four nuclear power plants in the UAE, the first in the Gulf.

In doing so, it beat France's Areva and a US-Japanese consortium led by General Electric Co and Hitachi, providing another illustration of how economic power is moving from West to East.

It is this broader geo-economic shift that will fundamentally propel Gulf-Asia relations, many conference speakers said. Freeman saw broad scope to cooperate to resculpt a "decaying international order" marked by the demise of the post-post colonial era in the Middle East, recession in the West and the re-emergence of Asia as the global centre of wealth and power. -Reuters